Greece, Germany and Euro: who are the bad guys?

Greece, Germany and Euro: who are the bad
guys?

by Keith Rankin3 April
2012

The financial and economic problems of
the Eurozone seem to be in abeyance at the moment, at least
in the New Zealand media. But the European crisis is a story
that is not going away, with the European Union as a whole
moving into recession - negative growth - as the demands
being made by the northern Eurozone creditor countries on
the southern debtor countries are suppressing demand for
goods and services throughout the Union.

Radio New Zealand
reported today that the average rate of
unemployment in the Eurozone has risen to 11%. (And that's
only the jobless who meet the stringent international
definition of unemployment.) While the southern European
countries still have easily the highest unemployment rates,
the overall increase is mainly due to rising unemployment in
the countries that are not thought to be in crisis. In part
it is due to southerners living in the north losing their
jobs, or being less able to find employment there. Migration
to the north is becoming less of a solution for young
Greeks.

The usual explanation of the crisis is one of
feckless southern Europeans - Greeks in particular - paying
themselves unsustainably large borrowed incomes, avoiding
taxes as if that were a national sport, and living at the
expense of their generous but frustrated northern
neighbours.

While all mainstream narratives contain some
nuggets of truth, the bigger truth here is the
'mercantilist' business model, operated by the northern
Europeans in general, and the Germans in particular. There
is no shortage of Google responses to a search of "German
mercantilism".

Before elaborating, I would like to
recommend Neville Bennett's excellent historical perspective
on the problem ("Greeks forced to kill what they love",
National Business Review, 17 February 2012), the
Media 7 TVNZ interview with Giovanni Tiso and Rod
Oram (1 March 2012), and Tiso's article "Europe's perfect ruins" in
Overland.

Mercantilism is a political-business
system, though it is often regarded as a defunct economic
theory. The concept was originally deployed by classical and
neo-classical economists (for example by Adam Smith as the
"mercantile system"; by Thomas Malthus as the "commercial
system") as a label for the self-defeating nationalist
policy strategies of the European business classes in the
nation-state and later nationalist periods, essentially from
the 1490s to the 1920s.

The core belief was that economic
success for a nation was to accumulate geopolitical power by
running balance of payments current account surpluses;
essentially by selling more than they bought, exporting more
than they imported. By definition, to sell more than you buy
makes you a creditor. Further, because mercantilism is,
conceptually, zero-sum finance, countries can only be
successful in mercantilist terms if other countries are
unsuccessful. Unsuccess here means to buy more than you
sell, automatically making you a debtor.

So Greece (and
the other iPigs - Ireland, Portugal, Italy, Spain) can be
understood as the losers of an intra-European mercantilist
struggle. Conspiracy theorists argue that that's what the
Eurozone was about, all along; a means through which the
thrifty Bang countries (Belgium, Austria, Netherlands,
Germany) can accumulate financial wealth at the expense of
the Pigs. This kind of thinking resonates most of all in
Greece, a country occupied by Nazi Germany in the
1940s.

The irony is that, in a mercantilist struggle (in
which, globally, the winner nations are mostly in northern
Europe, the Middle-East, and East Asia), the losers end up
with lots of stuff (goods and services) and little money,
whereas the winners end up enjoying living standards far
less than their incomes entitle them to, sitting on their
money rather than allowing it to circulate. To an economist,
the losers, unless later punished by austerity programmes,
get more stuff relative to costs incurred than do the
winners.

In order for the winners to actually win in terms
that an economist can appreciate – maximisation of long
run consumption growth - they have to reverse their strategy
every now and again. The Germans and the Dutch can stabilise
the European system as a whole by spending their loot (or
"treasure" as the 17th century mercantilists called it). But
they don't and they won't, because they have a deeply
ingrained cultural propensity towards earning more and
spending less; a northern predisposition that can only be
realised if it is indefinitely accommodated by the spending
of others. Thus the iPigs countries, with a greater
predisposition to spend, balance the Bang countries, but
only so long as they are allowed to do so. Eventually, an
über-crisis occurs. Then, following another Great
Depression or World War or decade of inflation (or, if we
are lucky, a managed default), a level playing field may
once again be achieved and the game starts all over
again.

The ball is, in 2012, in the court of the northern
Bang countries: use their surpluses or lose them. Spend, or
take a "haircut". The reality of this decade, however, is
that those who can spend will not, and those who will spend
can not. So the issue becomes the form that the financial
losses will eventually take, and when the next of an
escalating sequence of financial crises will occur.

We see
now that the northern European countries are moving into
recession, because they are losing their southern European
customers. They are no longer able to sell to southern
Europe on credit, as, as successful mercantilists, they were
doing for many years.

The last time we had these kinds of
dramas, in the 1920s, Germany was, by virtue of losing World
War I, on the debtor side. The long-term lessen that Germans
learned was to be a successful mercantilist nation; to never
be a debtor victim again; rather, someone else should be the
financial victims next time. (After the Asian financial and
economic crisis of 1997-98, the Southeast Asian nations have
also joined the northeast Asian countries in making that
commitment to be successful mercantilists, at whatever cost
to their own working classes.)

What happens when every
nation makes a commitment to be successful mercantilists,
and when none are willing (as New Zealand, like Greece,
generally has been) to accommodate their surpluses by
running current account deficits? That's when the
race-to-the-bottom really gets underway; as it did in the
1920s, leaving the Great Depression as its legacy.

In the
1920s, France and the USA ran the gold standard much as
Germany and the Netherlands run the Euro today. They
accumulated gold because their currencies were undervalued
against gold, whereas the British pound was overvalued.
Britain defaulted big-time in 1931, thereby creating the
necessary conditions for its own recovery. France and the
USA, on the other hand, the winners of the 1920s'
mercantilist struggle, suffered a decade of depression in
the 1930s as their exports dried up.

Germany was in a
unique situation in the 1920s. After World War 1, through
the Treaty of Versailles, Germany was required to pay France
and Britain directly, and the USA indirectly (given its war
lending to Britain and France), a massive amount of gold.
Not being a gold-producing country, Germany could only
acquire this gold by running a trade surplus. (In the
mid-1920s, Germany did pay, but only by borrowing from the
USA; when debtors pay their creditors by borrowing from
their creditors, it's known as Ponzi finance.) But France,
the USA, and Britain (which in the late 1920s was undergoing
an austerity programme not unlike that presently being
undertaken willingly by Ireland) were all strongly resisting
their requirement to buy German goods. So Germany defaulted
on its reparation debts, despite its own massive austerity
programme from 1929 to 1932. The Americans resisted German
imports (cheap, thanks to massive deflation) by introducing
its notorious Smoot-Hawley tariff in 1930.

We can be
confident that, if in the 2010s, the southern European
nations break out of the Eurozone by forming a Southern Euro
(which would immediately depreciate), then Germany and the
other northern Bang nations would impose trade barriers on
those nations, effectively forcing them out of the European
Union altogether. Germany, while imposing an export-led
solution on Greece, is unlikely ever to allow Greece to
succeed in exporting goods to Germany that Germany presently
makes for itself. (The simplest way for this to happen would
be for German companies to relocate to Greece and Spain,
taking advantage of cheaper post-austerity wages in the
south, and raising their own unemployment. But German
nationalism will prohibit that.)

Can the Greeks get out of
their bind simply by defaulting, leaving the Eurozone, and
reintroducing the Drachma at a depreciated rate? This would
be essentially the Argentine solution to its 2002
bankruptcy. Argentina had fixed its currency to the $US. In
2002 it defaulted, and allowed its peso to depreciate
dramatically.

The answer for Greece is a qualified yes,
but there are two provisos. First, just as those in
Argentina with savings and nous had their savings in actual
foreign currency - and not simply in pesos pegged to the
dollar - so most wealthy Greeks will have most of their
savings held outside of Greece, for example in German, Dutch
or Swiss banks. Thus they'll make a speculative killing when
or if Greece leaves the Eurozone, creating substantially
more inequality in Greece.

The second proviso is that such
a default will be seen by the markets as the first of many,
creating a substantial European banking
crisis.

Nevertheless, the sensible way to go would be for
Spain, Italy, Portugal and Greece to secede simultaneously,
creating a southern European Union that has the potential to
recover much as Argentina did, and to export mainly to the
anglo (English-speaking) economies, and to emerging
economies, especially Latin America, in direct competition
with northern Europe.

For the industrialised world as a
whole, once the massive financial write-downs have taken
place, and by whatever means and however much time it takes,
there will be an opportunity to participate in a new
economic order that specifically repudiates nationalist
mercantilist strategies. At some time in the future there
may be globally shared economic security and eco-prosperity;
otherwise there will be globally shared insecurity and
poverty.

Keith Rankin has taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith lives with his family in Glen Eden, Auckland.

Contact Keith Rankin

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